Jul 19, 2017
Operator
Welcome to the M&T Bank Second Quarter 2017 Earnings Conference Call. It is now my pleasure to turn the floor over to Don MacLeod, Director of Investor Relations.
Please go ahead, sir.
Don MacLeod
Thank you, Maria, and good morning. I’d like to thank everyone for participating in M&T’s second quarter 2017 earnings conference call both by telephone and through the webcast.
If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link. Also, before we start, I’d like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation.
M&T encourages participants to refer to our SEC filings, including those found on forms 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements. Now, I’d like to introduce our Chief Financial Officer, Darren King.
Darren King
Thank you, Don. And good morning, everyone.
As we noted in the earnings press release this morning, we are quite pleased with M&T's results for the second quarter. Further actions by the Federal Reserve through a short-term interest rates back in March and more recently in June led the further expansion of our net interest margin by some 11 basis points which in turn contributed to 3% growth in net interest income, both of those compared to the first quarter.
Compensation expense declined from seasonably high levels we typically see in the first quarter of the year, and overall expenses remain well controlled. Credit cost continues to be stable and nonaccrual loans declined slightly.
We substantially completed CCAR 2016 capital plan with continued repurchases of common stock during the second quarter and receive no objection from the Federal Reserve as to our CCAR 2017 capital plan. Let's have look at the numbers.
Diluted GAAP earnings per common share were $2.35 in the second quarter of 2017, up 11% from $2.12 in the first quarter of 2017 and up 19% from a $1.98 in the second quarter of 2016. Net income for the quarter was $381 million, up 9% from $349 million in the linked quarter and up 13% from $336 million in the year ago quarter.
Recall that the results for the first quarter of 2017 reflected the impact from new accounting guidance for certain types of equity based compensation. Resulting in a tax benefit of $18 million or approximately $0.12 per common share.
The impact in the recent quarter was not significant. There were no merger-related expenses in either the first or second quarter of 2017.
However, results for the second quarter of 2016 included merger-related charges amounting to $8 million after-tax effect or $0.05 per common share. Also included in GAAP results in the recent quarter or at the after-tax expenses from the amortization of intangible assets amounting to $5 million or $0.03 per common share, little change from the prior quarter.
Consistent with our long-term practice, M&T provides supplemental reporting of its results on a net operating or tangible basis, from which we have only ever excluded the after-tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions. M&T’s net operating income for the second quarter, which excludes intangible amortization and merger-related expenses from the relevant periods, was $386 million, up 9% from $354 million in the linked quarter and up 10% from $351 million in last year’s second quarter.
Diluted net operating earnings per common share were $2.38 for the recent quarter compared an increase of 11% from $2.15 in 2017’s first quarter and up 15% from $2.07 in a second quarter of 2016. On a GAAP basis, M&T’s second quarter results produced an annualized rate of return on average assets of 1.27% and an annualized return on average common equity of 9.67%.
That compares with rates of 1.15% and 8.89% respectively in the previous quarter. Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders’ equity of 1.33% and 14.18% for the recent quarter.
Comparable returns were 1.21% and 13.05% in the first quarter of 2017. In accordance with SEC’s guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity.
We turn our attention to the balance sheet and income statement. Taxable equivalent net interest income was $947 million in the second quarter of 2017, improved by $25 million from the linked quarter.
The net interest margin improved to 3.45%, up 11 basis points from 3.34% in the linked quarter. As was the case last quarter, the single biggest factor driving the wider margin accounting for an estimated 9 basis points of the increase was the Fed's action to increase short-term interest rates with the late mark action reaching its full run rate during the quarter, and to a lesser extent, reflecting the increase in mid-June.
The average balance of funds placed on deposit with the Fed declined by approximately $1.4 billion from the first quarter, reflecting lower levels of deposits received from trust clients engaged in capital markets transactions, as well as lower levels of Escrow deposits received in connection with our mortgage banking operations. We estimate that these factors produced the benefit to the margin of approximately 4 basis points.
Offsetting these factors were several other items including continued core margin pressure. These items in aggregate amounted to approximately 2 basis points a pressure.
Average loans were essentially flat compared to the linked quarter. Looking at loans by category on an average basis compared with the linked quarter, we saw commercial and industrial loans up approximately 1% on an annualized basis.
Commercial real estate loans were roughly flat. Residential mortgage loans continued the planned runoff at a 16% annualized rate, consist with our experience in the prior quarter.
Consumer loans grew an annualized 8%, with growth in indirect auto loans and seasonal strength in recreation finance loans, offset by lower home equity lines and loans. The growth in consumer loans includes the benefit of approximately $130 million of auto loans that came back on to our balance sheet in the middle of the first quarter following the dissolution of our auto loans securitization.
Regionally, we are continue to make progress in New Jersey with good growth numbers on what is still a fairly modest pace, and in line with total loans growth on the commercial side were subdued in most other regions. Pennsylvania was particularly soft on the C&I side but was above average in CRE volume.
Average core customer deposits, which exclude deposits received at M&T’s Cayman Islands office and CDs over $250,000 declined by some $2 billion from the first quarter, reflecting the lower balances of trust and mortgage escrow deposits as well as the continued runoff of time deposits acquired with Hudson City. Turning to non-interest income.
Non-interest income totaled $461 million in the second quarter compared with $447 million in the prior quarter. Mortgage banking revenues were $86 million in the recent quarter compared with $85 million in the linked quarter.
Residential mortgage loans originated for sale were $770 million in the quarter, up approximately 6% compared with the first quarter. Total residential mortgage banking revenues, including origination and servicing activities, were $61 million compared with $58 million in the prior quarter.
The higher origination volumes and a winder gain on sale margin contributed to the linked quarter increase. Commercial mortgage banking revenues were $25 million in the recent quarter, down slightly from the prior quarter.
Trust income was $127 million in the recent quarter, up from $120 million in the previous quarter. The increase included approximately $4 million in fees earned in connection with helping trust clients prepared the tax filing.
Service charges on deposit accounts were $106 million, up $2 million compared with the first quarter primarily reflecting higher levels of customer activity. If the turn to expenses, operating expenses for the second quarter, which exclude or made the amortization of intangible assets were $743 million, compared with $779 million in the previous quarter.
Salaries and benefits declined by approximately $51 million from the prior quarter. The majority of which reflects the return to more normal run rate following the first quarter's seasonably high factors that I previously mentioned.
Most expense categories remained well controlled with the exception of other cost of operations. The increase of which reflects higher legal related and professional services expenses.
And these are likely to remain slightly elevated through the remainder of 2017. The efficiency ratio, which excludes intangible amortization and any merger-related expenses from the numerator and securities gains from the denominator, was 52.7% in the recent quarter.
That same ratio was 56.9% in the previous quarter and 55.1% in 2016’s second quarter Next, let's turn to credit. All of credit metrics are indicating that we remain in the benign part of the credit cycle.
Nonaccrual loans decreased by $54 million to $872 million at June 30 and the ratio of nonaccrual loans to total loans declined by 6 basis points to 0.98% compared with the end of the first quarter. Net charge-offs for the second quarter were $45 million compared with $43 million in the first quarter.
Annualized net charge-offs as a percentage of total loans were 20 basis points for the second quarter, up slightly from 19 basis points in the first quarter in line with what we've seen on average over the past three years. The provision for credit losses was $52 million in the recent quarter, exceeding net charge-offs by $7 million.
The allowance for credit losses was $1 billion at the end of June. The ratio of the allowance to total loans increased slightly to 1.13%, reflecting a modestly higher proportion of commercial loans on the balance sheet.
Loans 90 days past due on which we continue to accrue interest, excluding acquired loans that had been marked to a fair value-discounted acquisition, were $265 million at the end of the recent quarter. Of these loans, $235 million or 89% are guaranteed by government-related entities.
Turning to capital. Over the quarter we completed our CCAR 2016 capital plan, repurchasing $225 million of common stock that remained under plan and the Board's repurchase authorization.
Those repurchases, net of retain earnings, combined with the reduction in the balance sheet and in particular risk-weighted assets during the quarter, brought M&T's common equity Tier 1 ratio under the current transitional Basel III capital rules to an estimated 10.8% compared with 10.67% at the end of $900 million of share repurchases over the four quarter period beginning July 1, 2017. In addition, the plan contemplates a $0.05 per share increase in the common stock dividend in the second quarter of 2018, subject to declaration by the Board in the ordinary course of business.
Turning to the outlook. Halfway through 2017, our outlook is little changed from what we expected at the beginning of the year.
We had two rate actions from the Fed this year which have had significant impact on a net interest margin and which have led the stronger than expected net interest income growth. On the other hand loan growth, we've seen has been less than we expected.
For the year-to-date, average loans are up just under 2% compared with the first half of 2016. On that same basis, but excluding the impact from the runoff and residential mortgages, average loans increased 8.4% over the first half of 2016.
At present, we don't see lending conditions being materially different in the second half of 2017 from what they were in the first half. We continue to expect average loans for the current year to be up in the low single digits versus 2016 with continued pay downs on residential mortgage loans, offset by modest growth year-over-year in commercial and consumer loans.
The implied forward curve doesn't show any further rate actions by the Fed until late in the year. Given that, we expect more modest extension of the NIM from the current level and more modest growth in net interest than we saw in the first half of the year.
We see the potential for some pressure on margin in the second half including loan spreads and the impact from refinancing some of our long-term debt. The outlook for the businesses is little changed.
While we expect modest growth in mortgage banking revenues, we'll be pleased to match the strong results we saw in the second half of 2016, particularly on the commercial side. We continue to expect growth in the low to mid single digit range for other fee categories.
Our expense outlook is also unchanged. We continue to expect low nominal growth in total operating expenses in 2017 compared to last year.
And as I noted, professional services including legal related costs are likely to remain elevated through the end of the year. Our outlook for credit continues to be little changed from recent trends.
But as we've indicated in prior quarters, credit has been benign for several years and that we continue to view credit as more of a downside risk than an upside opportunity. As to capital, given our strong operating performance and solid capital ratios, we expect to begin execution of our 2017 capital plan shortly.
You may have seen our 8-K filing yesterday, noting that the Board has authorized a new buyback program in connection with the 2017 CCAR capital plan. Of course, as you are aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future.
Now let's open up the call to questions, before which, Maria will briefly review the instructions.
Operator
[Operator Instructions] Our first question comes from line of Ken Usdin of Jefferies.
Ken Usdin
Thanks. Good morning, guys.
Darren, I was wondering if you could just expand on the loan growth side. C&I was down at period end basis and I think you mentioned CRE was slower and that overall growth has been slower than expected.
So understanding you are still expecting low single digit average for the year. Can you help us understand just point to point growth from here?
Where you expect to grow especially in the non real estate runoff categories?
Darren King
Sure. So let's just kind of walk through each of the categories to try and help give a little clarity to what we were expecting to happen.
If we start with the non residential real estate consumer loan side, and you look at where the growth has been, it has been primarily in indirect both in auto and rec fi and those growth rates has been pretty consistent over the first half of the year. And fairly consistent with what we saw in 2016.
So we expect those trends to continue. And our rec fi was little high in the second quarter which is fairly typical given that it's bodes and are reason that tends to be the time of the year when people are looking for those kinds of vehicles.
When we -- residential real estate, it has been in a run down mode since acquired the Hudson City portfolio and the rate has averaged kind of 14% to 16% a quarter and we foresee that continuing. When we look at the commercial real estate part of the balance sheet, it's been relatively flat this year.
And there are a couple things that are going on within the portfolio. Notably, some of the construction balances that we originated in late 2014 and 2015, those projects have kind of under completion and are converting to permanent.
And often times the permanent financing is something that happens outside of the bank. So we are seeing a little bit of shift in the commercial real estate balance mix, a little bit away from construction towards more permanent.
And that shift is leading us to the more flat in terms of where those balances have been for the first half of the year. But the mix is helpful from a risk weighted asset perspective.
On the C&I side, what we've been seeing is slow growth and they kind of bounces around a little bit within the quarter. When we look by industry we don't see any industry that sticks out really positively or negatively.
And when we look by geography, we are not really seeing anything that sticks out positively or negatively. What I think we are seeing or what I guess the feedback that we receive when talking to our customers about their thoughts, the word that I was come back to is uncertainty.
And the thing that is on everyone's mind or appears to be is when we will have some direction out of Washington on several factors. When we talk to healthcare clients for instance, which we do a lot of business in skilled nursing facilities, the Affordable Care Act is at the front and center of their thought process.
And the uncertainty in which direction it might go is leading them to pause before making any investments so that they know what they might be able to expect from a cash flow perspective before they take on new debt and consider expansion. We talked to manufacturing clients; we see some interest in expansion.
Their first priority would be to grow by maybe adding some capacity through second shifts or additional labor. But the labor markets are tough for them to find skilled workers and they are reticent to invest in new equipment at the moment again given the uncertainties around where the economy is going.
So that's kind of the background to our outlook and we are not dire on the economy by any stretch. But I'd say there are some uncertainty and some cautiousness that when we look at the balance sheets of our customers and you saw it in our credit performance metrics, the business is very healthy.
They are still more optimistic than they were at the start or at this point last year. Maybe it's come down a little bit since the election highs but it's still generally optimistic.
They are just waiting for a little more certainty before they make any decisions and those companies that are investing are leaning more on their cash which have been at all time high in their business rather than taking on new debt. So until we get some little bit more certainty out of Washington I think we are likely in the spot for a little while longer and that's what is reflected in our comments.
Now we think that C&I will be a slow growth part of the portfolio over the next couple of quarters.
Ken Usdin
Yes. That's great color, Darren.
Thank you. And just one quick follow up on the overall size of the balance sheet.
You mentioned all the escrow deposits and the securities related stuff. Would you say that the average for this quarter was abnormally low just given the size of the balance sheet shrunk by few billion and how would you just explain that episodic nature of them?
Darren King
Sure. When you look at some of the components in those Fed balances and you start to see it also in the deposit balances on the other side of the ledger.
You've got some volatility in some of the escrow balances, as well as in what we call trust demand deposit which are a function of some of the M&A activity that's going on in the marketplace. And those two sets of balances will move around a little bit as activity, M&A activity shifts as well as our mortgage servicing customers look at third balances and try to manage their interest income.
So you'll see a little bit of volatility in those when we look at where the cash balances were this quarter. It's probably in the right range as we go forward but they will tend to move around.
I'll remind you that at this point last year they were over $10 billion. We've seen them move around and come back down into what we consider a more normal range over the course of the first half of this year.
And as we go forward my best advice is to think kind of in the $4 billion to $6 billion range and those things can move around a little bit within that spectrum.
Operator
Our next question comes from the line of Matt O'Connor of Deutsche Bank.
Matt O'Connor
Good morning. I just want to follow up on the outlook for the NIM.
I think you said something about -- first you said modest NIM expansion back half of the year but then you said there could be some NIM pressure from issuing long-term debt and some other moving pieces. So I was just hoping to flush that out in terms of what's specifically you are pointing to over the back half of the year?
Darren King
Sure. So we haven't seen the full benefit of the June hike in the second quarter's NIM so there is some upside we believe we are projecting based on that increase.
But it won't be the whole increase that we traditionally seen. And we think that will be muted slightly by some pressure we see on loan margins as well as by the debt that we are going to issue.
But overall we expect some extension in the margin in the third quarter and probably leveling off a little bit in the fourth given that there are no rate increases projected until December.
Operator
Our next question comes from line of Geoffrey Elliott of Autonomous.
Geoffrey Elliott
Hello, good morning. Thank you for taking the question.
I wondered if you could elaborate a bit on the CCAR ask on the buyback down quite a bit on for previous year. But loan growth still feels like it relatively subdued.
So why not ask for a higher buyback and retain capital outweigh when growing the loan book is tough given the Hudson City runoff.
Darren King
Sure. Happy to elaborate on that, Geoff.
And your thought process is very consistent with how we think about things. When went into CCAR 2017, the expectations for the economy and for loan growth were a lot different than what they proved to be over the course of the last six months and clearly over the last three.
So we put our projections together and we put our baseline together. We are all given scenarios that you have GDP growth and employment forecast and based on those we project forward what we think our growth will be both in loans and balances as well as interest income.
Fees what have you to calculate PPNR. And what I think is happened -- more than what I think is happened what I know is happened is reality has had rate increases come faster than what was those in CCAR projections and loan growth is a little bit slower which is creating more capital for us and for the industry.
And if we had seen that information in those projections then our asks certainly would have been different than what it was. When we kind of expected that it would be down a little bit year-over-year just given the magnitude of the ask-in in 2016 because of this excess capital we are carrying as a result of the Hudson City acquisition.
But overall when we look at CCAR and how things went this year, we are actually quite optimistic in how things went. Obviously getting our approval was a good thing but when we look at some of the changes and how the Fed's models are working in particular when you look at PPNR, we think they've started to take a more company specific approach to how they evaluate PPNR.
And we saw our PPNR percentage of assets over the nine quarter project period go up and it went up pretty much more than anyone else in our peer group. And we think reflects the consistent earnings that we've had in the low volatility of earnings that we produce.
So that's a positive on a go forward basis. And we also saw decrease in the loss rate's forecast on the mortgage portfolio.
They are still high by our estimates. But part of what's in there is I know a service by others portfolio where some of the information is harder to get and to provide as part of our submission.
But that's a declining portfolio. So when we look at where we are we see a lot of positives going forward that the PPNR puts us in a good position.
And obviously the margin increase and the capitals that we are producing every quarter sets us up well and the loan growth -- we like to see the loan growth but if doesn't come we will -- that will also create capitals that we will be able to distribute in the future. So overall in our eyes it's -- it was positive outcome and we look forward to next year.
Geoffrey Elliott
And then in terms of use of capital. How far away do you think you are from being able to get back to M&A?
Where the things stand with the written agreement?
Darren King
So with regards to written agreement, we are working with our regulators now to go through the work that we've completed and to make sure that it is 100% compliant with the terms of written agreement and that we fulfilled all of our obligations which we of course believe we have done. And we are just working through that with the regulators now to -- hope that they will agree with our assessment and we will be able to have a positive resolution to that sometime this year.
Operator
Our next question comes from line of Erika Najarian of Bank of America.
Erika Najarian
Yes. Thank you for all the color on the second half of the year.
I'm wondering if I could just assume Darren you talked about an efficiency ratio target at the low end of your 55% to 57% range. Given that this quarter came in at 52.7% should we expect that efficiency outlook is still valid or could you fall below that range?
Darren King
It's given where we've been for the first half of the year. It's probably likely that we'll end up a little bit below the 55% range.
This quarter was abnormally low, even exceeded our own expectations. And I think there is a couple -- one primary factor there which is deposit pricing just hasn't been as reactive as I don't think we are or anyone in the industry thought which really create a lot of net interest income and helped to bring that efficiency ratio down.
As we look forward we believe at some point we are going to start to see that. It hasn't happened yet but we'll start to see that and as I mentioned before we'll have a little bit of elevation in expenses of the second quarter number for some of the legal issues that we are working on.
And the combination of those two things I suspect will have the efficiency ratio little bit higher than where it was in the second quarter but full year we are likely to be below the 55%, the bottom end of the 55% that we've talked about earlier in the year.
Erika Najarian
Thank you. And my follow up question is really sort of piggybacking off of Geoffrey's line questioning.
So you mentioned that the Fed is getting better at being more specific about its stress testing. You mentioned PPNR improvement and continued improvement in losses that actually reflect your risk profile.
I'm wondering if your shareholders can look forward to the resumption of capital payout growth in 2018. And if you think about payout versus M&A, if you could give us some insight on the decision tree there especially given where you are valued on a tangible book basis.
Darren King
Sure. So all else equal if we were -- if we were starting the 2018 capital plan submission today, the distribution request would likely be higher than what it is or was in 2017.
Just given the fact that our capital ratios have gone up and that the net income -- sorry the PPNR production is also improved. And it's always been our philosophy and how we run the bank to put that shareholder capital to best use and a return above our long-term cost to capital.
We typically want to invest that in the business which is by growing the business. And then after that we look to distribute to the shareholders through a combination of dividends and buybacks.
When we look at M&A, we don't hold excess capital on the comp hoping that M&A will show up. We've always been successful going to the market if we need capital to fund an acquisition and raising that capital because of our shareholder return focus and generally the positive financial nature of the deals that we've been able to do in the past.
And we would expect that to continue. So now when we look at where we sit from a capital perspective, we continue to target operating at the low end of the peer range in terms of our CET-1 ratio given our credit history and our low volatility of earnings.
And put that money back to work first in the business. Second, distribute to shareholders and then as acquisition opportunities present themselves, and if they are attractive from financial perspective as well as from a strategic perspective then we would put that money to work in an acquisition.
Erika Najarian
And just one technical question and thank you for that response. When banks file their capital plan for the CCAR process, do you have to ask upfront you know that you know deal is part of your strategy over the next four quarters or that can happen outside of CCAR -- formal CCAR planning?
Darren King
So the process is you would not put anything in the plan that wasn't definite. So in the plan if you already had a merger agreement in place then your CCAR plan would include the assumption that deal closed during the CCAR period.
You would forecast the PPNR of the combined entity. You would forecast the charge-offs in the combined entity and you would look at what your capital ratios are, assuming that two organizations will merge and then you would make your capital distribution request based on that.
You wouldn't hold capital and put in a deal that isn't even on the table on the assumption that something might happen. It's got to be known to the extent that a merger presents itself in the middle of the period; you would resubmit or provide an updated capital plan and kind of mini CCAR if you will, with your merger request.
Operator
Our next question comes from the line of John Pancari of Evercore.
John Pancari
Good morning. On the back to the loan growth detail.
And thanks for the color you gave there but what I am trying to get more info on is, on the C&I decline and the end of CRE balances. What was that exactly attributable to?
And then when you look at where C&I in isolation could grow in coming quarters. I know you had indicated that there are several factors and that could be volatile.
Are we looking at similar low single digit range for that as well? And I guess the similar question for CRE given the kind of financing factors you see in there.
Darren King
So on C&I and when you look at what's going on with the balances within there, there is a number of components that are happening. One, when you look at credit lines and line utilization.
We saw those cap out in the second quarter and start to flatten out. So people not drawing on the lines anymore are one thing that starts to slowdown the growth.
I'll remind you that history has said that in the third quarter we tend to see a decrease in C&I balance because of our auto floor plan business that is the model year changeover. You tend to see a decrease in the third quarter before the new model year start to show up in the showroom floor, which tends to increase in the fourth quarter.
And then when you look more broadly at the C&I, whenever in any quarter and in any year there is a mix of pay down, pay offs and new originations. And when you see the decrease in loan balances it's generally a function of the pace of new originations as opposed you see us speed up in pay down.
So when we look at the loan growth that we had and what we foresee, it's not that we are seeing charges-off increase that are bringing balances down or prepayment speed increase. What we are just seeing is more cautious attitude from our customers towards the future and originations being a little bit slower than what we had seen through 2016.
John Pancari
Okay. That's helpful.
And on commercial real estate. Given the volatility there, given the pressure or the shifting you are seeing from some of the construction credits now moving into permanent financing that implies that you don't have the back fill happening with incremental construction growth.
And therefore front end issue there as well. Is that likely the case and that keep CRE flattish?
Darren King
I think CRE will be flattish to slightly growing. It's obviously a function of activity and what's going on in the construction and real estate market in general.
We did see a little bit of slowdown in construction; at least with our customer base overall the last sort of while they have been working on the projects that we had financed for them through 2016 and in latter half of 2015. Now if you look at where our growth was last year, particularly in the second half of the year was very heavy in CRE and in construction.
And our customers are busy with those projects and not taking on new business. Over time those will come to pay down and we mentioned I think a couple of times that will flip into more of a pay down mode in the construction side over the course of the second half of 2017 and into 2018.
And then we'll see where new activity goes. And whether it picks back up on the construction side or shifts more towards the permanent site.
John Pancari
Okay. Thanks.
And then last Darren just around the deposit base. I know you had indicated that so far they remain low.
You just indicated where you have seen them post the June hike and where you expect they can move. Thanks.
Darren King
It's a great question. It's a tough one to handicap only because we are still in a territory we've never been in before.
And we all keep expecting that something is going to happen but it hasn't. So on the side that says things will stay the way they are.
You see bank loan to deposit ratio is still below a 100%. You see changes in the money fund industry and that alternative is still less attractive than it was.
And you see absolute Fed fund rates lower than they were at the end of the last time Fed funds were this low. So it's still little bit of un-chartered territory.
On the side that you say we might start to see movement, certain customers especially larger balanced customers will start to pay more attention to the rates that they are getting. And we'll see a little bit of pressure there but at this point we still are expecting that they just will remain relatively low for one more hike at least maybe two.
And in terms of where we are seeing any activity all tends to be larger balanced customers where it's more of one off conversation. Where we are talking to them based on our total relationship, being a relationship oriented bank.
And we see some movement on the consumer side generally in the CD space mainly in the 1and 12 months terms. You seem some kind of new terms coming up of 13 and 14 months from certain competitors and certain geographies but overall pricing has been fairly stable.
And we anticipate that it's likely to continue that way for the next little while. If you do see any increase in deposit, often times they are customers who have an index driven rate and when you see the rates move it's because the index move.
But overall still pretty quite on the deposit front.
Operator
Our next question comes from line of David Eads of UBS.
David Eads
Hi, good morning. Thanks for the color, Darren.
Maybe just couple of kind of other topic. You mentioned a couple of times you guys can growing in indirect auto.
And I am just curious what you guys are seeing from the competitive backdrop there? Whether guys kind of pulling out, are you seeing that have an impact on pricing return in that market?
Are things getting better there?
Darren King
It's a great question. And it's something that we spend a lot of time looking at given the nature of that business and how competitive it is and how good accessed information is from the dealer network about what others are doing.
And we are aware of the pull back that we've seen from others industry. It had relatively modest effect on our origination so far.
Mainly because the space that we operate in isn't the super prime and it's not the subprime. It's not even really the near prime.
It's kind of the lower end of prime. I don't know whether there is such a category or not maybe we are naming one here.
But that customer base and that credit window that we've operated in has been pretty consistent for probably the last three or four years. And the volumes that we originate have also been fairly steady month-to-month and quarter-to-quarter.
They can move around if we average let say $120 million a month, it can drop down to $100 million and it can go up to $140 million, $150 million but we don't see it doubling in any month or quarter or shrinking down materially below $100 million because that customer space where we are looking at cyco, we are looking at the vehicle itself and the term is spot where we have been pretty consistent and our volumes have been pretty consistent as a result.
David Eads
Great. Thanks.
And then I know you have talked on securities portfolio but the yield went down sequentially that was little surprising to me. And you guys had talked about bringing down asset sensitivity and what was implies anyway -- I was kind of expected that you maybe walk something in longer term in securities line and leads a little bit more extension.
Can you just kind of walk through the dynamic there?
Darren King
So on the securities portfolio, there is a couple things. We slowdown little bit some of the reinvestment of the cash flows that we were paying off from the mortgage backed securities.
And we did a little repositioning of the securities portfolio to increase the percentage that is in Ginnie Mae in particular to improve the percentage to qualify as the top tier of high quality of liquid assets. And as we made that switch you start to see a little bit movement in the margin because those tend to have slightly lower coupon than the other asset categories.
But there is no change that we made in terms of the duration of the portfolio and yes --
Operator
Our next question comes from the line of Brian Klock of Keefe, Bruyette & Woods.
Brian Klock
Good morning, gentleman. So, Darren, just a follow up question to what John had asked you about loan growth.
And I know you said there weren't any significant pay downs you saw. It was more from an origination perspective, there is more muted on the origination side.
Is there any correlation to the big drawdown in the noninterest securing deposits and maybe some of those market customers they are just accessing the success equity versus trying to go out and take out a loan just what kind of fund their operations until they get more clarity from what's going on in Washington? Is that anything you are hearing from your customers?
Darren King
It's definitely we are hearing it from the RMs Brian but if you look at the decrease in those deposit balances, the biggest drivers are really the escrow balances and the trust demand balances. They are maybe a little of it, that's part of the phenomenon that you are referencing.
But at this point or for this quarter I should say that wasn't the biggest driver there. It was really more of the escrow and the trust demand.
Brian Klock
Got it. Thanks for that.
And the fee income side and the other miscellaneous fee income. It seemed like it was up this quarter about $6 million sequentially.
Anything in there that's nonrecurring or anything that's -- or is that [1.17] a better run rate that use going forward.
Darren King
So when you look at that line item, Brian, there is a couple of things that were really driving the change quarter-to-quarter. One was loan fees.
We had a fairly active quarter in our advisory and syndication parts of the bank. So they had a very strong quarter.
And then the other part of it is our investment in Bayview and that the over time the carrying cost of that is now down to zero. So instead of that number being negative in that other income line is now zero.
So that one is definitely recurring and will be around for a while. The loan fees obviously we are hopeful that those will continue at that level but obviously that moves around with the market.
Brian Klock
Okay. So within they are the -- usually the insurance income is usually little bit seasonally softer in the second quarter or is that after good first quarter was the insurance revenues offset in there even though these other items were positive.
Darren King
It was materially different.
Brian Klock
Okay. And just one last question on the deposit side.
With the time deposit again you had another quarter of sequential decline in the rate pay down time deposit. I know you talked about the Hudson City remixing and reprising of that.
I guess how much more do you think --should we see similar types of decline as we go into the back half of the year on the cost to time deposits.
Darren King
So the rate of decrease should start to slow in particular as it relates to the margin. So when you look at what's in that book slightly over half is less than a year in terms of duration.
And skewed towards six months and less. There is half of the book that we still need to reprise.
But it will reprise over a longer time horizon because those were time deposits that we are carrying at two, three and five year term on them. And it's going to take the course of the next couple of years for those to reprise.
So you've got half of the book that has been reprised probably couple of times already and are closer to market rate. And then you've got the other half that will reprise probably in equal proportions over the next three years.
Operator
Our next question comes from line of Peter Winter of Wedbush Securities.
Peter Winter
Good morning. I just want to go back to the reducing some of the assets sensitivity that you talked about in the past.
Can you just give you an update where it stands today and kind of how it's going to trend going forward?
Darren King
Sure. If you look at the bank overall, we remain asset sensitive.
That sensitivity is come down a little bit in the second quarter and you probably see that in the Q when it comes out that when you look at the impact of rates moving up or down 100 basis points which will you see is a slightly lower increase in net interest income when rates go up. But the offset is that obviously is that if rates were to drop you would see a slightly less smaller decrease in net interest income when rates go down.
And really what we were thinking over the course of the start of the year was that we had an extra hike that we didn't anticipate. I don't think anyone did in March.
And that the rate increases given our asset sensitivity create a lot of net interest income. And not that we are expecting rates go down.
But if rates were to go down, with deposits not reprising that increase would equally go away. And we though it was prudent, and again as we think about managing the bank for lower volatility, start to lock in a little bit of that.
And in the quarter we hedged about $4 billion of the balance sheet and give it in kind of equal parts of loan hedges or cash flow hedges as well as deposit related hedges or funding hedges, debt hedges and that produce that change in sensitivity which lower the asset sensitivity a little bit. And whether we do more or not remains to be seen depending on what the forward curves look like.
But as rates move throughout the quarter we didn't think that it made sense to continue that so we stopped it at $4 billion.
Peter Winter
Great. And did any of that contribute to some of the margin expansion this quarter?
Darren King
It helped a little bit. But really it's just more -- we had hedged and kind of locked in the forward curve.
So the curve, as long as it shows up the way we expect it, it doesn't have a material impact on the margin. But it was about as expected and the impact on the margin this quarter was really not material.
Peter Winter
Thanks. And just one quick follow up on CCAR.
There have been a couple of questions, results were very good, capitals building, I am just wondering if is there any thoughts of possibly resubmitting a capital plan later this year?
Darren King
It's a good question. We are focused in the last little while on getting through the quarter and doing our work to see where the capital ratios ended up given the strong performance.
And we'll take a look and see and if we decided to do something we'll let you know.
Operator
Ladies and gentlemen, we have time for one question. Our final question comes from the line of Gerard Cassidy of RBC.
Gerard Cassidy
Good morning, Darren. How are you?
Good, thank you. Can you give us an update on just on the written agreement that you have with the regulators?
I think you have been saying that you hope to have it lifted by the end of the year. Is there any update there?
And second as part of that, with the changes in Washington not really having heads of the OCC, TROs position is not been replaced yet either. Does that complicated at all for you guys?
Darren King
So I'll start with the first part. I unfortunately I have no news to share with you on the written agreement.
I mentioned earlier that we've completed our work and we are working with our regulators now to review that to make sure that they concur with our assessment that we have fulfilled all of our obligations under the written agreement. And then from there we kind of go to Washington to review that work and hopefully obtain agreement that we have completed all the parts of the written agreement.
Within Washington, there are enough staffers around that have been there to make a decision but I think it's probably a little bit difficult. And this is speculation on my part right that without someone in those positions that it might be a little bit more difficult to finalize that.
But I don't know how the workings at the Fed, how the Fed operates internally to say that's definitively a help or hindrance to us getting, giving some progress on the written agreement.
Gerard Cassidy
Very good. And then just as a follow up, you guys obviously have spent an enormous amount of capital and money to meet the terms of the written agreement and I believe if Bob put in the letter, shareholder letter that share that total regulatory expense is now are about $440 million which are up meaningful from pre crisis or around the crisis time.
Should we anticipate once the written agreement is lifted and your systems are all running smooth, that the $440 million could come down a bit because I am assuming part of that number was to build out what you need to build out? Now it's more just maintain and improves what you have.
Darren King
So, George, the way I would think about the $440 million is that's largely the run rate going forward. And there are a number of components that are part of that.
Some of those are what we would consider a little bit more soft dollar cost if you will. And that it is time a front line staff talking to our customers about regulatory related things, collecting information what have you.
And so those folks will still be around talking to customers. We just hope that they are going to talk more about business and a little less about their documentation.
So those expenses will go away. We have added expense in our compliance department for the AML/BSA functions as well as for some of the modeling related to CCAR and stress test.
And as we continue to get smarter and more sophisticated in those areas, we expect there to be some efficiency gains. But you are not going to see $440 million go down to $200 million.
We are talking more like 5% to 10% kind of normal efficiency gain so you can get through time through automation and process improvement as opposed to material parts of the operation go away.
Operator
Thank you. That does conclude the Q&A portion of the call.
I'll now like to turn the call back over to Don MacLeod for any additional or closing remarks.
Don MacLeod
Again, thank you all for participating today. And as always, if clarification on any of the items of the call or news release is necessary, please contact our Investor Relations department at 716-842-5138.
Thank you and good bye.
Operator
Thank you, ladies and gentlemen. This does conclude today's M&T Bank's second quarter 2017 earnings call.
You may now disconnect.